Planning your budget for next year is a difficult task for many producers, but there are a few tips for staying on top of your books. When it comes to planning, nurseries and greenhouse growers need to be aware of certain financial measures.
Scott Mickey, an agribusiness extension associate at Clemson University’s Cooperative Extension Service, offers two important formulas producers should use when budgeting for the next year.
Neither of these formulas is industry specific and both apply to nursery and greenhouse growers, especially when followed year after year.
The first producers of financial ratio must know:
Working Capital (Current Assets – Current Liabilities) / Operating Expenses (all expenses except interest and amortization)
This formula provides your working capital efficiency, which is a measure of the company’s liquidity.
“The reason I like this one is that it gives me an idea at the start of the year of how much of my projected operating expenses I can cover with the working capital that I dispose at the end of the year,” Mickey said.
Ideally, your business should aim for 25% or more. It’s a solid goal, Mickey said.
“So if you want to spend $1,000,000 on operating expenses, you need to have $250,000 in working capital at the start of the year,” he said.
How to calculate it
Your current assets are items that will turn into cash within a year.
Normally, when you look at your balance sheet, they’re going to be listed this way: the top items are already cash. The items at the very bottom of your balance sheet shouldn’t turn into cash for a long time.
Elements considered as assets: cash, accounts receivable, inventory. Also, all expenses prepaid on harvest.
Stocks that will be for sale next year are also considered an asset.
“However, if I grow a plant from a 1 gallon pot to a 3 gallon pot to 5 gallons and it will be a 7 gallon plant when I sell it, that’s not really a current asset,” Mickey warned. “It will be a long-term asset. If you know a 3 gallon plant is available for sale, you can put it in your current assets. Maybe you pocket 100 thinking you’re going to sell 75 and repot and increase the size by 25.”
Comparing this year to last year is a valuable benchmark, but it loses its usefulness if your books are written in a different way. Be sure to treat the same items as current and future assets from year to year. Consistency is the key.
“The biggest caution I would have here is just to be consistent year over year with how you treat this inventory,” Mickey said.
Current liabilities are items that must be paid within a year. This includes accounts payable, accrued interest on any outstanding debt. Depending on the business structure, this could include income taxes. It would not appear on the sole proprietor’s balance sheet, but it could be payroll taxes or accrued interest on any unpaid debt. Most important, Mickey said, is the current portion of the principal on long-term liabilities.
For example, if a nursery owner bought a loader for $50,000 and financed it for five years, he would only have to find the current portion of the capital that year. In this case, if he repays $50,000 over five years, his current share of the principal would be $10,000. The other $40,000 is considered a long-term liability.
The second part of this equation concerns operating expenses. This includes everything a business spends except interest and depreciation. It includes the costs of labor, rent, and inputs like growing media and fertilizer.
So if a business expects to have $1 million in operating expenses, it would divide its working capital by $1 million. The resulting number is the working capital efficiency.
When evaluating a business based on working capital efficiency, Mickey uses a 3-tier system: vulnerable, resilient, and agile.
“Agile is kind of a green light zone that goes over 25%,” Mickey said. “Your business would be vulnerable if it were below 10%. So if you have less than 10% working capital expense at the start of the year, you’re likely going to have cash flow issues.
Liquidity is important to producers for many reasons.
“You have other cash needs in the business during the year in addition to operations,” Mickey said. “
Some growers on the greenhouse side may think they can get by with less cash because they turn their crops so often. Mickey warned that while they get paid more frequently, they also spend money more frequently. It is always important to try to improve your liquidity if you are in this vulnerable position.
If you have accurate financial records, try to assess your working capital efficiency over a 3-5 year period. For example, if you are at 10% now and you were at 5% 3 years ago, you are making progress. For producers struggling with cash flow, this is a huge step in the right direction.
“I feel better about this than a producer who started at 25 three years ago and is now 20,” Mickey said.
“He’s still in a better position, but his trend is not what we like to see. You don’t need to panic if you find you’re at 10%. You just need to have a plan to move that.
EBITDA Efficiency (EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortization) / Gross Revenue
This second formula is useful for producers, as it helps them to determine if they are too indebted for the income of their business.
Basically, you take your total income and subtract all of your expenses except interest, depreciation, and amortization. This is your EBITDA, or abbreviated as “profits”.
Ideally, the income will be 30% of the remaining income after paying all your expenses. So if a producer had revenues of $1 million, to be considered agile, their revenues would be $300,000. This is not a profit, because you would still have to subtract interest and amortization. What you can think of is a concrete number that shows how much is available for equity growth and debt service for every dollar generated.
In this example from the producer with $1 million in revenue and $300,000 in revenue, Mickey said that ideally you wouldn’t want to spend more than half of your revenue on interest and principal payments. And he wouldn’t spend more than 25% on income tax. This would leave 25% of profits for asset acquisition, whether it’s buying a piece of equipment or just putting money in the bank.
“That’s where it gets fun, if you can manage your debt and reduce it and grow your equity faster with the same 30% EBITDA efficiency,” Mickey said.
The producer’s point of view
Economists believe that high input costs and supply chain issues will persist and that controlling costs and locking in margins where possible on part of production is an important risk management strategy.
Mike Gooder, president and CEO of Plantpeddler in Cresco, Iowa, believes growers should take a closer look at their finances, especially their costs.
“We’re pretty hardcore in cost analysis,” Gooder said. “And I think if there’s one recommendation I have for producers, it’s the fact that this time around you can look at your costs and be relatively sure to raise prices no matter what. .markets you serve because there is an expectation.As people have inflationary costs that affect almost everything in their lives, they expect the $4 4.5 inch geranium to now cost 4, $ 50. If the cost of goods, labor cost and energy cost increase, these are the three biggest costs in the greenhouse. If you don’t increase prices now, it there may be no tomorrow.
When applying these formulas, make sure you factor in input costs. As most producers know, they skyrocketed. Darrell Bunnell of Coview Farm and Greenhouses in Coberg, Kentucky, said the variable cost has made pricing a difficult but crucial proposition.
“We had to raise prices last year because the cost of everything went up so much,” Bunnell said. “The plastic pots, the soil, everything went up. So we went up some things and stayed the same on others. We don’t like to go up everything on every level. The prices are going to be high. You don’t don’t like I don’t know what the prices of things will be until they bring them in.”